Investing 101

You won't get too far with your investing if you haven't absorbed some critical basic concepts. Start with these:

• Time is your greatest ally. If you earn just 8 percent, on average, on your investments, you can increase your wealth nearly sevenfold in 25 years and tenfold in 30 years.

• Know your tolerance for pain. Don't put all your eggs in too few baskets, or in baskets that keep you from being able to sleep at night. Be prepared for some inevitable losses. Expect the market to go up and down from week to week, but up over the long haul.

• Know what you do and don't know. Stay within your circle of competence, and consider expanding it - perhaps studying an industry of interest or learning how to read a balance sheet. (You'll find guidance at www.fool.com/school/basics/ basics.htm.)

• Know what your company does. With many high-tech or scientific companies, such as Pfizer, Cisco Systems or General Electric, understanding all they do is easier said than done. You must know your company's products or services, and how it stacks up against competitors. Otherwise, it's very hard to evaluate future prospects.

• Know your company's market capitalization (its total share count times its current price per share). Having a sense of its size permits you to gauge how big a business it is in relation to competitors. Wal-Mart's market cap is more than $200 billion, while Sears and Target are each less than $20 billion.

• Study your company's financial statements. For example, assess its sales and earnings growth rates. Check out its cash and debt situation. Make sure accounts receivable (money owed the company) and inventory aren't growing faster than sales, as that suggests things are getting out of control.

• Assess the reliability of your company's profits well into the future. Does it have sustainable competitive advantages, or will low barriers to entry permit newcomers to quickly set up shop and compete?